Sunday, September 26, 2010

First off, your website is great, thanks for all the information you've posted. I know you cannot take the place of paid legal advise but I was hoping to get your opinion on my situation.

My wife and I currently live and own a home in Oregon. It's small and we are ready to move on. We owe about what the house is worth so selling it has not worked. Due to our income and low debt we have qualified for a home loan on another house and plan to buy it and move there.

We would rent out our current house, and if we run into any financial trouble, just stop making payments on the rental and focus on keeping our new primary residence. Since Oregon is a non-recourse state, the lender should not be able to come after our assets or primary residence for not paying the rental house mortgage correct?

Get Answer: The issue of non-recourse/anti deficiency is an important one. Keep this in mind: even if Oregon is a non-recourse state, you need to now how Oregon implements its rules. It may not be an absolute, blanket ban against the collection of a deficiency debt by a lender. Please check this link to learn more about Oregon's deficiency laws : https://www.oregonlaws.org/ors/86.770. So yes...please consult with a qualified attorney in your area.

What if we refinance the soon to be rental house to get a better interest rate?

Get Answer: That would lower your payment and perhaps make it profitable to rent the house. Even with no current equity. Yet you are not totally upside down.

I was told that if you refinance, your loan becomes full recourse, regardless of what state you are in, is this true?

Get Answer: It may be true. Generally, if a loan was not used to purchase the house then there may not be any protection under relevant non-recourse/anti-deficiency laws. So please consult with a qualified attorney.

If we want to keep and rent this house long term, a refinance makes the best financial sense, but I don't want to take away the option of a strategic default by refinancing into a full recourse loan. An extra $100 in interest payments per month seem worth the cost to keep all options open.

What is your opinion on this?

Get Answer: Well said. Essentially the $100 monthly cost is your insurance payment for staying protected under Oregon's anti-deficiency laws. Yet, if you refinance the loan you may earn income. Furthermore, if you refinance into a fixed rate mortgage then over time the principle balance will be lowered. You may gain equity if property prices have stabilized in your area. However it may not be likely. Keep in mind that if the foreclosure sale of your property satisfies the lender in full then there is no deficiency. Also any difference owed to the lender may be settled for less than what is due or it may be forgiven. Forgiven debt may be considered taxable income. However, under current Federal law forgiven debt may not be taxable if it involves a primary residence. Focus on acquiring the other property as soon as you can. Spend more time considering your strategic default alternative. Please read this link to learn more about debt obligations and deficiency. Also speak with a qualified professional to round out your thinking.

Thanks
JA

Thank you for reaching out.

---- Below Is JA's Response To Get Answers...----

Thanks for your response, that was helpful.

I've done a little more research on Oregon's anti deficiency laws and it seems its not as clear for us as recourse vs. non-recourse state like I first thought.

This is what I understand from reading the statutes:
If a non-judicial foreclosure is an option under your loan contract (if a power of sale agreement was signed as part of your loan, which is likely) in Oregon, then the bank can go this route seize your house and sell it with proper notice. They are not allowed to come after you for any debt deficiency resulting from the sell of your house in a non-judicial foreclosure.

If there is no power of sale agreement, or if the bank simply chooses to go this route, they can choose a judicial foreclosure. This will result in a public auction of your house and a deficieny judgement against you for the difference in what the bank gets and what you owe. Because this option is more time consuming for the bank, it is less likely, unless you are significantly under water and the bank thinks you have enough resources to make a deficiency judgement worth thier effort. Luckily for us right now we owe about as much as the house is worth so the bank most likely would not pursue this option. If housing prices continue to fall that might not be the case.

So it turns out the walk away options is less do-able then I had hoped. Especially because the mortgage debt tax foregiveness only applies to primary residences, not rentals. For now it looks like we will proceed with buying the new house, renting out the first house and hoping that property values stabilize or rise. If not, we'll have to think a little bit more about the consequences of a strategic default.

Friday, September 3, 2010

An article like the following cannot go unnoticed, unread, and un-commented upon. MSNBC.com reports on Homeowners Feeling The Pressure From A Life 'Underwater'. The article talks about a homeowner who is "doing what millions of Americans are doing these days: He's getting used to living life 'underwater' - the real estate industry's term for a property worth less than the outstanding mortgage on it".

From the perspective of any person considering a strategic default, there are two main points in the article to consider:

1. The homeowner interviewed in the article has a good job and can afford to make payments, however he cannot tap into any equity. He purchased the property with 100% financing. On top of that he is illegible for a loan modification because he makes to much money. My thought: Why not provide a principle reduction to home owner's willing to make mortgage payments on an upside down property.

2. The homeowner admits to being tied down to the property. However he moved into the basement to rent the two bedrooms in his home. His goal is to use the extra money to reduce the principle balance of the mortgage. My thought: This homeowner has found a creative way to regain equity so he can become "untied" from the property. He is also preserving his good credit in hopes of getting a loan or refinance in the future.The only questions are: can he create equity faster than the current decline of property prices? and will good credit matter if he does not have cash for a down payment or if lenders continue to restrict lending? Only time will tell.

Now, of course, this is old news. Businesses have always used a strategic default when it is in its best financial interest. Businesses generally do not have moral constraints. Yet, this recent article establishes that strategic default is growing simply because assets (in this case real estate) are worth less than the debt secured by the asset. Most importantly, the article illustrates why homeowners and small real estate investors should seriously consider strategic default.

The article begins "Like homeowners walking away from mortgaged houses that plummeted in value, some of the largest commercial-property owners are defaulting on debts and surrendering buildings worth less than their loans."

My thought: One should not overlook this comparison by a major business publication.

"Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts. In many cases they have walked away, sending keys to properties whose values had fallen far below the mortgage amounts, a process known as 'jingle mail.' These companies all have piles of cash to make the payments. They are simply opting to default because they believe it makes good business sense."

My thought. It should be understood that lenders handle strategic defaults on commercial loans differently from residential loans. In other words, a strategic default on a commercial loan has a better chance of forcing a lender to make a deal than a residential loan. At the end of the day the decision is purely financial. It is more likely a lender will collect from a commercial loan modification than a residential loan modification. That being said one cannot ignore the hypocrisy of it all. Several weeks priorFannie Mae announced that it would punish homeownerswho strategically default. In fact, our government has been seeking do the same thing. WHY DON'T THEY PUNISH COMMERCIAL PROPERTY OWNERS.

"These pragmatic decisions by companies to walk away from commercial mortgages come as a debate rages in the residential-real-estate world about 'strategic defaults' when homeowners stop making loan payments even though they can afford them. Instead, they decide to default because the house is 'underwater' meaning its value has fallen to a level less than its debt. Banking-industry officials and others have argued that homeowners have a moral obligation to pay their debts even when it seems to make good business sense to default. Individuals who walk away from their homes also face blemishes to their credit ratings and, in some states, creditors can sue them for the losses they suffer. But in the business world, there is less of a stigma even though lenders, including individual investors, get stuck holding a depressed property in a down market. Indeed, investors are rewarding public companies for ditching profit-draining investments."

My thought: This represents a turning point in the argument against home owner's strategically default. No matter how one reads the prior quote from the article there is one inescapable conclusion. It will no longer be possible to separate the accepted practice of strategic defaults by big business, commercial investors, and our government from strategic defaults employed by consumers. Therefore, it is unlikely Fannie Mae's attempt to punish strategic defaulters will work. It is unlikely that any rule, regulation, or law to limit or prohibit a strategic default by a citizen will ever be effective and most importantly, it is unlikely an such rule or law will ever be legal.

For those who are considering a strategic default. Rest assured that if a strategic default makes sense, you will always be on solid footing.